AD–IA model: Difference between revisions

Revision as of 03:36, 25 October 2006

Revision as of 03:37, 25 October 2006

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A shift in demand can occur for the following reasons:

- A change in government spending

- A change in consumption

- A change in taxes

- A change in the monetary rule

'''Example''': Suppose the government were to cut taxes. This would lead to an increase in expenditures and thus an increase in demand. The demand curve would therefore shift to the right and real GDP would be growing above potential. The inflation adjustment line would then shift upward (reflecting an increase in the inflation rate) causing a movement along the new demand curve until real GDP was equal to potential.